Optimal Dynamic Hedging in Selected Markets

Tunahan Yılmaz*
Cilt 13, Sayı 4

This study examined the most optimal hedging portfolio for some selected emerging and developed markets by employing dynamic conditional variances and dynamic conditional covariances. Throughout the study, the daily index values of some selected investment instruments were used. The data contained the period from 02/01/2006 to 01/11/2018. In this essay, to obtain the most efficient hedging portfolio for each emerging country, first, dynamic conditional correlation-fractionally integrated generalized autoregressive conditional heteroskedasticity model specifications were used to measure volatility. In this regard, AIC and log-likelihood were performed to measure how well a particular model fits the data. Also, for univariate and multivariate models, Box-Pierce and LiMcLeod test statistics were used to determine the existence of the autocorrelation problem and the ARCH effects on standardized residuals and squared standardized residuals. Second, the robustness of the model was checked by observing its out-ofsample forecast performance. Then, the mean absolute deviation was calculated to detect the most fitted model. Third, two methods were mentioned: optimal hedge ratio and optimal portfolio weight. The optimal hedge ratio provided specific determination of which part of the GOLD in the long-term position should be invested in the Stock Market Indices in the short-term position. With the direction of the above-mentioned model, the most optimal investment portfolio was analyzed by using optimal portfolio weight. Finally, the economic rationale behind the results was proposed, implying that, first, investors are risk-averse. Especially in a financial crisis, each market player has a tendency to keep their profits at a certain level because the aggregate demand for commodity is most likely expected to lessen, and they are prone to making risk diversification of their asset by selling some part of it in the short term. GOLD is the most valuable asset in the long run, as it is a safe haven asset, reflecting that it is lowly correlated with other investment instruments. For a short-term position, the reason why BOVESPA and FTSE_100 are most convenient investment instruments to be invested in the short term were explained.

Keywords: DCC-FIGARCH, Out-of-Sample Forecast, Mean Absolute Deviation, Optimal Hedge Ratio, Optimal Portfolio Weight
JEL Classifications: G11, G17.
DOI #: 10.33818/ier.839349